Chapter 4 · Part 4 — Statement of Cash Flows
The direct method, and cash from operations
Why loans and deposits are operating for a bank, and the single best earnings-quality test in the whole report.
37 terms. Profit is an opinion; cash is a fact. This statement explains how the balance in Cash and cash equivalent moved from the start of the year to the end. For a bank it behaves in ways that surprise anyone trained on a manufacturer's accounts — a profitable, fast-growing bank routinely reports negative operating cash flow, and that is normal.
Part 4 checklist
Operating (14): Interest received · Fees and other income received · Dividend received · Receipts from other operating activities · Interest paid · Commission and fees paid · Cash payment to employees · Other expense paid · Operating cash flows before changes in operating assets and liabilities · (Increase)/Decrease in operating assets · Increase/(Decrease) in operating liabilities · Net cash flow from operating activities before tax paid · Income taxes paid · Net cash flow from operating activities
Investing (10): Purchase of investment securities · Receipts from sale of investment securities · Purchase of property and equipment · Receipt from the sale of property and equipment · Purchase of intangible assets · Receipt from the sale of intangible assets · Purchase of investment properties · Receipt from the sale of investment properties · Investment in subsidiaries, associates & joint ventures · Net cash used in investing activities
Financing (8): Receipt from issue of debt securities · Repayment of debt securities · Receipt from issue of subordinated liabilities · Repayment of subordinated liabilities · Receipt from issue of shares · Dividends paid · Other receipt/payment · Net cash from financing activities
Reconciliation (5): Net increase (decrease) in cash and cash equivalents · Cash and cash equivalents at the beginning of the year · Cash and cash equivalents acquired from the merger · Effect of exchange rate fluctuations on cash and cash equivalents held · Cash and cash equivalents at the end of the year
Structure, and the direct method
The three-activity architecture
┌─────────────────────────────────────────────────────────────────────┐
│ OPERATING ACTIVITIES │
│ The bank's core money-dealing business. │
│ │
│ ! FOR A BANK THIS INCLUDES THINGS A MANUFACTURER WOULD CALL │
│ INVESTING OR FINANCING: │
│ • Loans made to customers (outflow) │
│ • Loan repayments received (inflow) │
│ • Deposits taken (inflow) │
│ • Deposits repaid (outflow) │
│ • Interbank placements/borrowing │
│ │
│ WHY: lending and deposit-taking ARE the bank's trading activity. │
│ A loan is a bank's "inventory," not its investment. │
└─────────────────────────────────────────────────────────────────────┘
+
┌─────────────────────────────────────────────────────────────────────┐
│ INVESTING ACTIVITIES │
│ Acquiring and disposing of long-term assets and investments │
│ NOT held for dealing: │
│ • Investment securities (treasury book) │
│ • Property, plant and equipment │
│ • Intangibles, investment property │
│ • Investments in subsidiaries and associates │
└─────────────────────────────────────────────────────────────────────┘
+
┌─────────────────────────────────────────────────────────────────────┐
│ FINANCING ACTIVITIES │
│ Changes in the size and composition of CAPITAL and LONG-TERM │
│ BORROWING: │
│ • Share issues │
│ • Debentures and subordinated liabilities │
│ • Dividends paid │
│ │
│ ! CUSTOMER DEPOSITS ARE **NOT** FINANCING FOR A BANK. │
│ They are operating. This is the classification most often │
│ got wrong. │
└─────────────────────────────────────────────────────────────────────┘
║
▼
╔═════════════════════════════════════════════════════════════════════╗
║ NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS ║
║ + Opening balance ± FX effect = Closing balance ║
║ which MUST equal the balance sheet's "Cash and cash equivalent" ║
╚═════════════════════════════════════════════════════════════════════╝Direct vs indirect method
The source report states its choice: "The interim cash flow statement has been prepared using the direct method whereby operating profit is adjusted for effects of non-cash transactions such as depreciation and loan losses."
DIRECT METHOD INDIRECT METHOD (used by Nepali banks, NRB format) (common elsewhere) ────────────────────────────── ────────────────── Interest received 18,855,966 Profit before tax 5,748,026 Fees and other income 2,919,856 Add: Depreciation 368,009 Interest paid (11,637,580) Add: Impairment 2,345,056 Commission and fees paid (237,215) Less: Interest income (21,041,592) Cash paid to employees (2,621,625) Add: Interest expense 11,615,353 Other expense paid (1,537,198) … etc ──────────────────────────────── ────────────────────────────────── = actual cash movements = profit reconciled to cash OK Shows WHERE the cash came from OK Shows WHY profit ≠ cash x Needs more system detail x Hides gross flows
The headline result — read it before anything else
(NMB, Asar 2083, NPR thousand.)
Group Bank
Net cash flow from operating activities (10,461,461) 1,978,418
Net cash used in investing activities (16,516,587) (16,421,613)
Net cash from financing activities 2,114,329 2,081,665
─────────── ───────────
Net increase/(decrease) in cash (24,863,720) (12,361,531)
Cash at beginning of year 46,995,817 33,385,654
Effect of exchange rate fluctuations 142,619 142,619
─────────── ───────────
Cash at end of year 22,274,716 21,166,742 OKCash halved at Group level. Reconciles exactly to the balance sheet. Now the analytical question: is that alarming? Work through Part 4 and the answer emerges — mostly no, because NPR 16.5 billion of it went into investment securities, which are themselves highly liquid. But there is a real signal in the operating line, which we will come to.
OPERATING ACTIVITIES
Interest received
Simple definition. Interest the bank actually collected in cash.
Technical definition. Cash inflows from interest on loans and advances, investment securities, placements and balances with banks, recognised when received rather than when earned.
The critical comparison — and the single best earnings-quality test in the report.
Bank standalone (NPR thousand)
Interest INCOME (P&L, accrual) 21,041,592
Interest RECEIVED (cash flow, cash) 18,855,966
──────────
GAP 2,185,626
Gap as % of interest income = 10.39%What the gap means.
Interest income = interest RECEIVED + interest ACCRUED but NOT YET COLLECTED
± movement in prior-year accrualsA widening gap is a warning. It means an increasing share of reported interest income is a receivable rather than cash. Combined with NMB's NPL rising from 4.11% to 4.91%, a 10.4% gap is consistent with genuine collection pressure.
Do the same test on the prior year to see the trend:
FY2081/82: Interest income 22,267,952
Interest received 20,211,466
Gap 2,056,486 = 9.24% of income
FY2082/83: Gap 2,185,626 = 10.39% of income
─────────────────
Deterioration of 1.15 percentage pointsModest, but moving the wrong way — and consistent with everything else in this bank's asset quality picture.
The NRB link. This is precisely why NRB's distributable profit statement carries the line "Interest receivable (-)/previous accrued interest received (+)" — NPR (297,150) thousand in the source report. Accrued but uncollected interest is stripped out of distributable profit. You cannot pay a dividend out of money you have not received. See Part 7.
Why it is operating. Interest is the bank's trading revenue, so NAS 7 classifies it as operating for a financial institution. (For a non-financial entity, interest received may be classified as investing — a permitted policy choice under NAS 7, but not the practice for banks.)
Analyst practice. Compute the cash conversion of interest income every period:
Interest received
Interest cash conversion = ────────────────────────── × 100
Interest income
NMB Bank: 18,855,966 ÷ 21,041,592 × 100 = 89.61%
Prior yr: 20,211,466 ÷ 22,267,952 × 100 = 90.76%Related terms. Part 2.1 Interest income · Part 7 Interest receivable · Interest paid
Fees and other income received
Simple definition. Cash actually collected from service charges and other operating income.
Technical definition. Cash inflows from fees, commissions and other operating income, excluding interest and dividends.
*(NMB, Asar 2083, Bank: NPR 2,919,856 thousand against net fee and commission income of NPR 2,590,868 thousand plus other operating income of NPR 325,545 thousand = NPR 2,916,413 thousand accrual. Cash received slightly exceeds accrual income — meaning prior-period receivables were collected. A healthy sign: fee income converts to cash almost immediately, which is one of its attractions.)*
Why fees convert better than interest. Fees are usually collected at the point of service — an LC commission is taken when the LC is issued, a card fee when the card is issued. There is no long receivable tail as there is with interest on a term loan.
Related terms. Part 2.4 Fees and Commission Income · Part 2.9 Other operating income
Dividend received
Simple definition. Cash dividends collected from shares and mutual fund units the bank owns.
Technical definition. Cash inflows from dividends on equity investments, recognised when received.
Presentation note — a genuine oddity in this report. The line appears twice: once in operating activities (showing nil) and once in investing activities (NPR 69,366 thousand). NAS 7 permits dividends received to be classified as either operating or investing, provided the policy is applied consistently and disclosed. NMB's format retains both lines and populates the investing one.
NAS 7 policy choice for a financial institution:
Dividend received → OPERATING (part of trading revenue), OR
→ INVESTING (return on an investment)
NMB: classified as INVESTING (NPR 69,366 thousand, Bank)Related terms. Part 2.9 Other operating income · Part 8 Dividend Income
Receipts from other operating activities
Simple definition. Miscellaneous operating cash inflows not captured elsewhere.
Technical definition. Residual operating cash receipts, including recoveries, sundry income and other operating inflows.
(NMB, Asar 2083: NPR 194,151 thousand for both Group and Bank, down from NPR 419,847 thousand. Identical across Group and Bank, indicating it arises entirely in the parent.)
Interest paid
Simple definition. Interest the bank actually paid out in cash to depositors and lenders.
Technical definition. Cash outflows for interest on deposits, borrowings, debt securities and lease liabilities.
The comparison.
Bank standalone (NPR thousand)
Interest EXPENSE (P&L, accrual) 11,615,353
Interest PAID (cash flow, cash) 11,637,580
──────────
Difference (22,227)Cash paid slightly exceeds the accrual charge — the bank settled some prior-period accrued interest. The near-identity tells you deposit interest is paid promptly, which is exactly what you would expect: depositors are paid on schedule.
TDS note. The cash figure is the gross interest; tax deducted at source on depositors' interest is remitted separately to the Inland Revenue Department [R].
Related terms. Part 2.2 Interest expense · Interest received
Commission and fees paid
Simple definition. Cash paid out for fee-related services the bank buys in.
Technical definition. Cash outflows for commission and fee expenses — card scheme fees, correspondent bank charges, agency commissions.
(NMB, Asar 2083: NPR 237,215 thousand, against a fees and commission expense of NPR 239,321 thousand — essentially full cash conversion.)
Related terms. Part 2.5 Fees and commission expense
Cash payment to employees
Simple definition. Cash actually paid to and for staff.
Technical definition. Cash outflows for employee benefits, comprising salaries, allowances, bonus payments and contributions to employee benefit funds actually disbursed.
The comparison — and what the gap tells you.
Bank standalone (NPR thousand)
Personnel EXPENSES (P&L, accrual) 3,051,537
Cash payment to EMPLOYEES (cash) 2,621,625
─────────
GAP 429,912 = 14.1% of expenseWhat sits in that NPR 430 million gap — all non-cash or not-yet-paid:
- Gratuity and leave provisions accrued but not yet paid out (actuarial, NAS 19)
- Staff bonus provided but payable after the year end
- The NPR 204.5 million VRS reversal, which reduced the accrual charge but involved no cash movement at all (see Part 1.16 and Part 2.14)
Related terms. Part 2.14 Personnel expenses · Part 1.26 Other liabilities · Part 8 NAS 19, VRS
Other expense paid
Simple definition. Cash paid for general running costs.
Technical definition. Cash outflows for operating expenses other than employee costs, interest and commission.
*(NMB, Asar 2083, Bank: NPR 1,537,198 thousand against other operating expenses of NPR 1,141,958 thousand. Cash paid exceeds the accrual charge by NPR 395 million, indicating settlement of prior-period payables and/or payments capitalised elsewhere.)*
Related terms. Part 2.15 Other operating expenses
Operating cash flows before changes in operating assets and liabilities
Simple definition. The cash the bank generated from its day-to-day trading, before accounting for growth in loans and deposits.
Technical definition. The net of operating cash receipts and payments, before movements in operating assets and liabilities — effectively the cash equivalent of operating profit.
Build-up. (NMB, Asar 2083, Bank, NPR thousand.)
Interest received 18,855,966
Fees and other income received 2,919,856
Dividend received −
Receipts from other operating activities 194,151
Interest paid (11,637,580)
Commission and fees paid (237,215)
Cash payment to employees (2,621,625)
Other expense paid (1,537,198)
───────────
Operating cash flows before changes in
operating assets and liabilities 5,936,045
Prior year 4,379,254
Growth +35.55%Why this subtotal is the most useful line in the statement. It is the bank's cash earning power, stripped of balance-sheet growth. Compare it to operating profit:
Operating profit (P&L) 6,117,506
Operating cash flow before changes 5,936,045
──────────
Difference 181,461 = 3.0%Very close. The bank's operating profit is substantially cash-backed — a genuinely positive finding, and one that partially offsets the concerns raised by the interest-received gap.
Related terms. Part 2.17 Operating Profit · 4.10, 4.11
(Increase)/Decrease in operating assets
Simple definition. Cash consumed (or released) by growth (or shrinkage) in the bank's lending and other operating assets.
Technical definition. The net cash effect of movements in operating assets — loans and advances, placements, balances with NRB and other operating receivables.
The sign convention — this is where readers go wrong.
ASSET INCREASES → cash went OUT to create it → NEGATIVE (outflow) ASSET DECREASES → cash came back IN → POSITIVE (inflow) Hence the label "(Increase)/Decrease" — the bracket on "Increase" signals it produces a negative number.
The detail. (NMB, Asar 2083, NPR thousand.)
Group Bank
Due from Nepal Rastra Bank (2,221,398) (2,208,898)
Placement with bank and financial
institutions (3,255,587) (3,255,587)
Other trading assets − −
Loan and advances to bank and financial
institutions 1,061,962 (1,529,927)
Loans and advances to customers (25,092,665) (23,122,651)
Other assets (11,686,979) (11,289,468)
─────────── ───────────
Total (41,194,667) (41,406,532)Read the dominant item. Loans and advances to customers consumed NPR 23.1 billion of cash at the Bank. That is the arithmetic of banking:
┌────────────────────────────────────────────────────────────────┐ │ A BANK THAT GROWS ITS LOAN BOOK CONSUMES CASH. │ │ │ │ Lending NPR 100 million: │ │ Dr Loans and advances 100,000,000 ← asset up │ │ Cr Cash 100,000,000 ← CASH OUT │ │ │ │ The profit from that loan arrives over YEARS as interest. │ │ The cash goes out on DAY ONE. │ │ │ │ → Fast loan growth = negative operating cash flow │ │ → This is NOT financial distress. It is growth. │ └────────────────────────────────────────────────────────────────┘
Note also the NPR 11.3 billion increase in Other assets — a very large movement for a residual line, and one an analyst should investigate in the notes (recall it contains the NPR 3.07 billion deferred employee expenditure and accrued interest receivable).
Group vs Bank on the BFI line. Group shows +1,061,962 (an inflow) while Bank shows −1,529,927 (an outflow). The difference is the parent's lending to its own microfinance subsidiary, which is eliminated on consolidation — see Part 1.6 and Part 10.
Related terms. Part 1.7 Loans and advances to customers · Part 1.16 Other assets · 4.11 · 4.13
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